What You Need to Know About Changes in the U.K. Capital Gains Tax Laws

In its 30 October 2024 budget statement, the British government increased the capital gains tax (CGT) rates on the sale of shares and other assets. The increase is effective 30 October 2024. The government also made changes to Business Asset Disposal Relief (BADR), a program designed to reduce the CGT rate on some of the profits from the sale of certain business assets. If you are the owner of a U.K.-based tech company you should be aware of these changes and their implications, especially if you are considering, or in the process of, selling your business.

What is subject to CGT?

In the U.K., you pay CGT on the gain when you sell or dispose any of the following “chargeable assets”:

• Most personal possessions worth £6,000 or more, apart from your car
• Property that is not your main home
• Your main home if you rent it out, such as for use as a business
• Any shares that are not in an Individual Savings Account (ISA) or a Personal Equity Plan (PEP)
• Business assets such as land, buildings, and fixtures
• How is CGT calculated?

The CGT depends partly on what type of chargeable asset you sell or dispose of and partly on the tax band into which the gain falls when it is added to your taxable income. A tax band represents a range of personal income which is taxed at a certain rate.

There are four tax bands for most people. The following table lists the four tax bands and their taxable income ranges. It also lists for each band:

• The income tax rate
• The old CGT rate
• The new CGT rate

Most individuals who are resident in the U.K. are entitled to an annual tax-free allowance called the annual exempt amount (AEA). For the 2024/25 tax year, the AEA is £3,000. You only pay CGT if your overall gains for the tax year (after deducting any losses and applying any reliefs) are above the annual exempt amount.

Prior to the U.K. government’s changes, the following CGT rates applied for the period 6 April 2024 to 29 October 2024:

• 10% (for individuals in the basic rate band) and 20% (for individuals in the higher rate bands). This does not include capital interest gains.
• 18%  and 24 % for individuals with residential property gains
• 18% and 28%  for individuals having carried interest gains
• 20% for trustees (does not include residential property gains)
• 24% for trustees (includes residential property gains)
• 20% for a personal representative of someone who died (not including residential property or carried interest gains)
• 28% for a  personal representative of someone who died  (including carried interest gains)
• 10% for gains qualifying for BADR

Here is a simple example of the CGT calculated on a share sale. In the 2024/25 tax year, Allan had an income of £50,000 after all allowable deductions and the personal allowance. Earlier, he bought 1000 shares of Tech Corp. at £5 per share, for a total cost of £5000. He sold all 1000 shares in 2024 for £10 per share, for a total of £10,000. Allan’s capital gain is £5000 (£10,000 - £5000). That capital gain is reduced by the £3,000 AEA, leaving a gain of £2,000.

There is £270 left in Allan’s basic rate band (£50,270 - £50,000). That amount (£270) will be taxed at 10%. And because the gain from the share sale pushes Allan's taxable income into the higher-rate band, the remaining £1730 (£2,000 - £270) will be taxed at 20%.

CGT on the share sale:

• CGT on capital gain in basic rate band: £270 x 10% = £27
• CGT on capital gain in higher rate band: £1730 x 20% = £346
• Total CGT: £27 + £346 = £373

Changes to the CGT rates

Starting on 30 October 2024 and continuing onwards (after the U.K. Autumn budget), the U.K. government’s changes to the CGT rates are as follows:

• 18% and 24% for individuals (not including capital interest gains)
• 18% and 24% for individuals with residential property gains
• 18% and 28%  for carried interest gains
• 24% for trustees (including residential property gains)
• 24% for a personal representative of someone who died (including residential property gains)
• 28% for a personal representative of someone who died  (including carried interest gains)
• 10% for gains qualifying for BADR

The AEA will remain at £3,000.

Looking at the previous CGT calculation example, Allan's CGT would rise from £373 to £463.80 based on the higher CGT rates. The £270 left in Allan’s basic rate band (£50,270 - £50,000) would be taxed at 18%, and the remaining £1730 (£2,000 - £270) would be taxed at 24%.

CGT on the share sale:

• CGT on capital gain in basic rate band: £270 x 18% = £48.60
• CGT on capital gain in higher rate band: £1730 x 24% = £415.20
• Total CGT: £48.60 + £415.20 = £463.80

Changes to BADR

BADR, also known as Entrepreneurs Relief, enables business owners and investors to reduce the CGT rate to 10% on capital gains made when they sell or dispose of eligible business assets, up to a lifetime limit of £1 million.

To qualify for BADR, certain conditions need to be met, such as you need to be the sole owner or partner of the business for at least two years, and the pertinent assets need to be part of the sale or disposal of the whole or part of a business. Also, shares that are disposed of must be ordinary shares in an unlisted trading company.

BADR will remain at 10%, something the U.K. government views as encouraging entrepreneurs to invest in their businesses. However, the BADR rate will increase to 14% starting on 6 April 2025, and to 18% on 6 April 2026. The lifetime limit will remain at £1 million.

These changes mean that business owners will have to pay an extra 4% in CGT on the first £1 million of capital gain if they sell or dispose of eligible business assets on or after 6 April 2025; or pay an extra 8% in CGT on the first £1 million of capital gain if they sell or dispose of eligible business assets on or after 6 April 2026.

The impact

For most business owners, the changes in BADR might not have a major impact. But the increases in the CGT rates can be significant. For example, a business owner who sells or disposes eligible business assets on or after 6 April 2025 that results in a capital gain of £2 million, would pay an extra £40,000 on the first £1 million of capital gain ‒ a tax amount that typically would not deter a business owner from selling if the sale total is attractive. However, the capital gain above the £1 million lifetime limit would be subject to the CGT rate hikes: 18% (from 10%) for those in the basic rate tax band, and 24% (from 20%) for those in the higher rate or additional rate tax bands. As an example, suppose an owner in the higher rate tax band sells his business resulting in a £2 million capital gain. In this case, the seller would have to pay 24% on any gain above the £1 million BADR lifetime limit‒ a significant tax burden.

The following table lists the impact of the CGT rate increases for individuals in the higher tax band who sell their businesses at various sale prices:

Even sellers in the lower tax band would be negatively impacted. The following table lists the impact of the CGT rate increases for individuals in the basic tax band who sell their businesses at various sale prices:

The reality is that many company owners in the U.K. pay themselves a limited salary so that their income does not put them in a higher tax band. They look to compensate for the lower salary when they exit their companies. With the changes from the U.K. government, company owners in the lower tax band will need to pay an additional 8% on any gain above the £1 million BADR lifetime limit. This could have a negative impact on company investment and could also deter entrepreneurs from starting businesses in the U.K.

What you can do to reduce your CGT

There are some things you can do to reduce your CGT, such as deducting any capital losses from your capital gain. However, the capital losses need to be more than the AEA of £3,000. You might also take advantage of a Stocks and Shares ISA. You can trade shares, funds, or other investments within the ISA, and any gain from those trades up to a limit of £20,000 are free from income tax or CGT. Or you can give away some of the business assets. This doesn’t eliminate the CGT on those assets, but it defers it until the recipient sells the assets. Yet another option is to sell a 50% or more stake of your business to an Employee Ownership Trust, something that can eliminate the CGT on that stake. However, there are strict criteria that need to be met if you plan to do this. There is also the possibility of relocating your business to a tax-friendlier country. However, before you take any of these actions it’s important to get professional advice from a qualified U.K. tax advisor as well as an M&A advisor on the potential impact of any actions pertinent to the salability of your company.

Now is a good time to sell your tech company

Now is a good time to sell (or consider selling) your U.K.-based tech company. At the very least, it's an excellent time to assess the current M&A market. That market is flush with investment capital. It's estimated that Private Equity firms have about $3 trillion in dry powder available for investment. There are also many strategic buyers currently in the market looking for bolt-ons or tuck-ins that they can scale.

Although market valuations for tech companies are not at the peak they reached a few years ago, they are still very high. In addition, selling your U.K. company now will avoid future tax hikes. You won’t be able to avoid the increases in the CGT rate because they will take effect immediately. But by selling now, depending on how long the process takes, you may avoid the increase to 14% in the BADR rate that takes effect on 6 April 2025. You likely would avoid the increase in the BADR rate to 18% that takes effect on 6 April 2026.

Now is also a good time to contact Corum. Corum has worked alongside U.K. accounting and law firms, advising on the sale of more technology companies than any other firm in history ‒ an unrivaled record driven by a highly professional, detailed M&A process designed to get sellers an optimal outcome. An optimal outcome includes maximized valuations, a properly negotiated transaction structure, minimized liability, and optimized taxes.

Pursuing an M&A process with Corum will identify what legitimate buyers are in the market and what they are willing to pay for your company. With that knowledge, you may decide not to sell your company if you don't get offers that match your goals. Corum even allows you to take a hiatus ‒ a pause in the M&A process ‒ and return to it at a later time when conditions are more favorable to get the results you want. No other firm can offer this commitment to your optimal outcome. Corum can due to  an almost 40 year track record and a team of experienced dealmakers, all former CEOs who have run, sold, and bought companies prior to joining Corum. They will advise and help you and your stakeholders achieve your optimal outcome.